MBS RECAP: Bond Markets Rally Impressively; MBS Underperform Treasuries
I was disappointed to see a few article headlines coming out this afternoon crediting this morning's negative economic data in Europe for an impressive domestic bond market rally. As you know, I'd be the first to attribute bond market movement in the US to European market influences when it's clearly the case, but it clearly was NOT the case today. In fact, if we set German Bunds and US 10yr Notes to the same scale of highs and lows before today, you can plainly see US Treasuries moved decisively lower while German Bunds actually WORSENED. Not only that, but today was a big move in the Treasuries compared to a much smaller move in Bunds.
What gives then? A few things. First of all, remember our recent discussions on bond markets not caring about economic data and instead being dominate by the 'tradeflow' considerations. Today we had no meaningful economic data and no meaningful market movers. Yet volume and participation picked up handsomely and movement was swift.
Tradeflows are the only explanation. This can be thought of quite simply as market participants making and covering bets intended to make a profit and other market participants being forced to make certain trades due to other activities (like corporate bond market hedging).
Some of those "bets" could have to do with positioning for tomorrow's FOMC Minutes. This makes good enough sense considering the Announcement itself was a negative day for bond markets and the speculation was that the Fed was actually more dovish than the market reaction would suggest. Perhaps traders think the Minutes are about to prove that point. Or perhaps we're simply getting back in line with the existing long-term trend in 2014 and nothing more complex than that.
Either way, we'll take it. 10yr yields hit their 3pm closing mark very close to their lowest levels in 16 months (-7 bps at 2.35, and they're moving lower after hours, now down to 2.339). MBS rallied strongly as well, but couldn't keep up with Treasuries. Fannie 3.5s are heading out the door up 14 ticks compared to 10yr's 23 tick gain (in price).
MBS | FNMA 3.0 99-27 : +0-17 | FNMA 3.5 103-07 : +0-13 | FNMA 4.0 106-07 : +0-08 |
Treasuries | 2 YR 0.5080 : -0.0280 | 10 YR 2.3410 : -0.0790 | 30 YR 3.0480 : -0.0790 |
Pricing as of 10/7/14 4:33PMEST |